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Monday, March 11, 2013

You could call it the mystery of the disappearing productivity crisis. Last week's national accounts for the December quarter confirmed that, if we ever really had an underlying problem with weak productivity improvement, we don't have one now. By now, that's not such a mystery. No, the puzzle is why the people who made so much noise about the supposed productivity crisis show little sign of having noticed its evaporation.

For months we had big business arguing the seemingly weak rate of improvement in the productivity of labour during the noughties needed to be corrected by restoring the Howard government's WorkChoices biasing of industrial relations law in favour of employers. Some even went so far as to claim it was Labor's Fair Work changes that caused the weak productivity improvement.

Another line we kept hearing was that a big cut in the rate of company tax was needed to get productivity up. No one prosecuted this campaign more enthusiastically than the national dailies; they were always fretting about productivity. Yet in their extensive reporting of the national accounts, neither found space to note what those accounts told us about such a crucial issue. Even the media's exaggerated preference for bad news over good isn't sufficient to explain that omission.

Call me cynical, but it makes me suspect all the tears shed over productivity were little more than cover for an exercise in big-business rent-seeking. Shift the rules in my favour and it'll do wonders for the economy.

In case you're wondering, the national accounts showed that, on the simplest measure - gross domestic product per hour worked - the productivity of labour improved by a roaring 3.5 per cent over the year to December.

But I think the best way to see what's been happening is this: using the trend (smoothed seasonally adjusted) figures for labour productivity in the market sector, it's been improving at the rate of 0.5 per cent or better for seven quarters in a row.

Obviously, 0.5 per cent a quarter represents an annualised rate of 2 per cent, which compares with the average rate of 1.8 per cent a year achieved over the past 40 years (and the 1.6 per cent Treasury is projecting for the next 40).

To be sure, the Bureau of Statistics warns against taking short-term movements in productivity too literally, preferring to do its measurement in completed "productivity cycles" that run for four or five years.

But the improvement we've seen over the past year or two isn't hard to credit. After all, the volume of production (real GDP) grew by 3.1 per cent over the year to December, whereas total employment grew by only 1.1 per cent and average monthly hours worked grew by just 0.2 per cent.

Nor is it hard to see how the few industries whose special circumstances did so much to make the economy-wide productivity figures look so bad are moving on from those circumstances. The mining investment boom shot the mining industry's productivity figures to pieces by adding inputs without yet adding much to outputs.

But the strong growth in the volume of coal and iron ore exports in the December quarter tells us the expanded production capacity is at last starting to come online. And we know the water utilities haven't undertaken a second round of building, then mothballing, desalination plants.

Big business is wedded to the happy notion that productivity improves when governments do things to make business's life easier. If these guys were a bit better versed in economics [as opposed to rent-seeking] they'd know the truth is roughly the opposite: productivity improves when governments either do things, or allow things to happen, that make life tougher for business.

What the Gillard government did was do nothing to lower the high dollar - not that there was anything sensible or effective it could have done - and limit the budgetary handouts to only part of manufacturing industry.

The result was a lot of pressure on export-and import-competing industries to raise their efficiency (or, at the very least, cut costs) or go under. As well, a lot of other industries, including retailers and much of the media, have been subject to pressure on sales and profits coming from the digital revolution and structural change.

These are just the tough times you'd expect would oblige firms to lift their game. As Reserve Bank governor Glenn Stevens said recently: "In several sectors of the economy a combination of factors is putting pressure on business models, and firms have been responding with an emphasis on lifting productivity and paring back costs. This process, while unavoidable, feeds into measures of sentiment ..."

As we go through a period of transition from mining-led growth to stronger growth in the rest of the economy, he said, "the pressures to adapt business models, contain costs, increase productivity and innovate will remain. But such adjustments are actually positive for longer-run economic performance."